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By Rajkamal Rao
Go back to Housing
Buying property in India for the novice returnee can be an extremely stressful exercise. If you buy into a new development from an established builder, the process may be better defined, but delays abound and customer service is generally awful. Click here for an overview of this process. (Buying into a New Development from an Established Builder).
If you buy an existing villa, home or flat - you must be extra careful because title ownership is difficult to verify. There have been many instances of fraud when the same property has multiple registered owners so you can never be too sure if the person who is selling the property really owns it in the first place. The concept of title insurance - protection against loss arising from problems connected to the title to your property - is alien in Indian real estate.
There have been a few technological developments, at least in Bangalore. Homeshikari.com advertises itself as a new website that eliminates agents by offering a “For Sale by Owner” model. For a fee, the website verifies the physical attributes of the property, the exact location of the property (geo-tagged) and its physical features, but not the title. As a returnee Indian, you are best advised to consult someone trusted before you sign on the dotted line to buy property.
The pricing of real estate is another stressful matter. Nowhere in India is what-the-market-will-bear pricing strategy more tested than when you buy property. Prices are quoted in INR per SFT, as in INR 3,750 per sft. This is deliberate so as to mask the actual value of the property, and to make changes appear smaller than they really are. You may have secured verbal agreement from the seller to close the deal at INR 3,750 but on the day of the sale, you should not be surprised if he raises his offer to INR 3,800 because the “price has gone up”. For a 2,400 sft property, the price would go up by 1.2 Lakhs. Just like that.
Financing
For the returnee, financing a home purchase can be a different experience from obtaining a mortgage in the west.
There are two kinds of lenders in the Indian mortgage market. Banks, both public and private (such as Canara Bank, SBI, Axis Bank) and Housing Finance companies (such as HDFC and LIC Housing Finance).
The most common type of loan is the resettable fixed rate loan. This is similar to the Adjustable Rate Mortgage in western countries in which the interest rate, after an initial period, can be changed by the lender at the lender’s discretion. The new rate will be in force for 2-3 years and reset again.
The loan terms and the repayment schedule are dependent upon your resident status in India - whether you are deemed a Non-Resident or a Resident. Terms can change when your status changes. Say that as a returnee Indian, you qualify as a NRI for the first few years of the loan but later on, your status changes to that of a resident Indian. Your bank will work out a new repayment schedule commensurate with your new resident status.
A common term you will hear is EMI which stands for Equal Monthly Installment. This is your net out-of-pocket cost each month to carry your mortgage and other fees. The fees fall into two buckets - processing fees and prepayment charges.
Processing Fees: The processing fees generally are linked to the value of the loan and can be as high as a flat 1% of loan value. The government imposes a 12.5% service tax on these fees.
Some banks offer a tiered structure for processing fees such as below (from LIC Housing):
Up to 30 lacs : 10,000 + (Service tax)
30 - 50 lacs : 15,000 + (service tax)
50 lacs - 1Cr : 20,000 + (service tax)
1Cr & above : 20,000 + (service tax)
Many banks offer discounted pricing for “salaried employees” because Indian organizations continue to have a favorable bias towards those that earn a regular paycheck.
Prepayment Charges: Once a loan is made, banks don’t like it to be paid off early. Some banks can charge a whopping fee equal to 1% of the loan amount (plus service tax) to allow you to prepay ahead of schedule.
Much like western economies, the Indian government allows tax filers to claim a mortgage deduction. Resident Indians are allowed to deduct, on their Indian income taxes, mortgage interest payments of up to INR 1.5 Lakh per year. Also, if your bank permits you to repay your loan ahead of schedule, you get added tax benefits for repayment of principal, up to INR 1.0 Lakh per year. These financial benefits, though small compared to the value of the property invested in, are still not trivial and need to be factored into your decision making process.
See Also: Documents Needed by NRIs to Obtain a Housing Loan
Go back to Housing
Buying property in India for the novice returnee can be an extremely stressful exercise. If you buy into a new development from an established builder, the process may be better defined, but delays abound and customer service is generally awful. Click here for an overview of this process. (Buying into a New Development from an Established Builder).
If you buy an existing villa, home or flat - you must be extra careful because title ownership is difficult to verify. There have been many instances of fraud when the same property has multiple registered owners so you can never be too sure if the person who is selling the property really owns it in the first place. The concept of title insurance - protection against loss arising from problems connected to the title to your property - is alien in Indian real estate.
There have been a few technological developments, at least in Bangalore. Homeshikari.com advertises itself as a new website that eliminates agents by offering a “For Sale by Owner” model. For a fee, the website verifies the physical attributes of the property, the exact location of the property (geo-tagged) and its physical features, but not the title. As a returnee Indian, you are best advised to consult someone trusted before you sign on the dotted line to buy property.
The pricing of real estate is another stressful matter. Nowhere in India is what-the-market-will-bear pricing strategy more tested than when you buy property. Prices are quoted in INR per SFT, as in INR 3,750 per sft. This is deliberate so as to mask the actual value of the property, and to make changes appear smaller than they really are. You may have secured verbal agreement from the seller to close the deal at INR 3,750 but on the day of the sale, you should not be surprised if he raises his offer to INR 3,800 because the “price has gone up”. For a 2,400 sft property, the price would go up by 1.2 Lakhs. Just like that.
Financing
For the returnee, financing a home purchase can be a different experience from obtaining a mortgage in the west.
There are two kinds of lenders in the Indian mortgage market. Banks, both public and private (such as Canara Bank, SBI, Axis Bank) and Housing Finance companies (such as HDFC and LIC Housing Finance).
The most common type of loan is the resettable fixed rate loan. This is similar to the Adjustable Rate Mortgage in western countries in which the interest rate, after an initial period, can be changed by the lender at the lender’s discretion. The new rate will be in force for 2-3 years and reset again.
The loan terms and the repayment schedule are dependent upon your resident status in India - whether you are deemed a Non-Resident or a Resident. Terms can change when your status changes. Say that as a returnee Indian, you qualify as a NRI for the first few years of the loan but later on, your status changes to that of a resident Indian. Your bank will work out a new repayment schedule commensurate with your new resident status.
A common term you will hear is EMI which stands for Equal Monthly Installment. This is your net out-of-pocket cost each month to carry your mortgage and other fees. The fees fall into two buckets - processing fees and prepayment charges.
Processing Fees: The processing fees generally are linked to the value of the loan and can be as high as a flat 1% of loan value. The government imposes a 12.5% service tax on these fees.
Some banks offer a tiered structure for processing fees such as below (from LIC Housing):
Up to 30 lacs : 10,000 + (Service tax)
30 - 50 lacs : 15,000 + (service tax)
50 lacs - 1Cr : 20,000 + (service tax)
1Cr & above : 20,000 + (service tax)
Many banks offer discounted pricing for “salaried employees” because Indian organizations continue to have a favorable bias towards those that earn a regular paycheck.
Prepayment Charges: Once a loan is made, banks don’t like it to be paid off early. Some banks can charge a whopping fee equal to 1% of the loan amount (plus service tax) to allow you to prepay ahead of schedule.
Much like western economies, the Indian government allows tax filers to claim a mortgage deduction. Resident Indians are allowed to deduct, on their Indian income taxes, mortgage interest payments of up to INR 1.5 Lakh per year. Also, if your bank permits you to repay your loan ahead of schedule, you get added tax benefits for repayment of principal, up to INR 1.0 Lakh per year. These financial benefits, though small compared to the value of the property invested in, are still not trivial and need to be factored into your decision making process.
See Also: Documents Needed by NRIs to Obtain a Housing Loan
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